Liquidity Constraints Of Shadow Banks To Hit Economic Growth: Moody's

Mumbai: Liquidity constraints faced by some non-bank financial institutions will likely tighten overall credit supply and slow the country's economic growth rate to just above 7 per cent for fiscal 2019 and 2020, global credit ratings agency Moody's said. According to the Moody's Investors Service, liquidity constraints faced by some NBFIs, after the default of Infrastructure Leasing & Financial Services (IL&FS) in September 2018, will likely tighten overall credit supply in the country.

"Consequently, India's GDP growth will slow to just above 7 per cent for fiscal 2019 and 2020. This result is below an estimated 7.4 per cent out-turn in the fiscal year ending March 2018 and below the pick-up in growth that we envisaged a few months ago," said Michael Taylor, a Moody's Managing Director and Chief Credit Officer for Asia Pacific in a statement, on Thursday.

"In addition, any further distress in the Indian NBFI sector will pose significant downside risks to India's growth outlook."

As per the statement, NBFIs are an important provider of credit to the country's economy. In the fiscal year ended March 31, 2018, NBFIs accounted for nearly 17 per cent of total loans and one third of total retail loans.

"In a downside scenario, a sharper slowdown in NBFI credit supply would significantly tighten overall credit availability, drive up borrowing costs and reduce economic growth by around half a percentage point over a few years," says Joy Rankothge, a Moody's Vice President and Senior Analyst.

"Weaker nominal GDP growth over a prolonged period would weigh on India's fiscal strength and the overall sovereign credit profile," added Rankothge.

Moody's conclusions are contained in its just-released report titled "Cross-Sector-- India: Slowdown in non-bank credit growth to weigh on economy".